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Federal court puts brakes on DOL's new overtime rule

On November 22, 2016, a Texas federal judge entered a nationwide injunction blocking the US Department of Labor (DOL) from implementing its new overtime rule. The new regulation, which was supposed to become effective on December 1, 2016, would have more than doubled the minimum salary level for exempt employees under the Fair Labor Standards Act (FLSA), to $913 per week ($47,476 annually) from its current level of $455 per week ($23,660 annually). The court’s decision marks the latest of several nationwide injunctions issued over the past five months blocking implementation of President Obama’s regulatory agenda, including a Department of Education’s rule relating to transgender bathroom access (now pending before the Supreme Court), the DOL’s “persuader rule” requiring law firms to publicly disclose any work they do for employers surrounding union organization efforts, and portions of the President’s Fair Pay and Safe Workplaces Executive Order impacting certain government contractors.

The suit relating to the overtime rule was brought by 21 states and various industry groups. The plaintiffs contended, among other things, that the new rule deviated from Congress’s unambiguous intent to exempt executive, administrative and professional employees from the overtime provisions of the FLSA based on their job duties, not a salary level. Enacted in 1938, the FLSA requires that certain covered employees receive overtime pay at one-and-one-half times their regular rate of pay for all hours worked over forty in a week. Section 213(a)(1) of the FLSA exempts from this overtime requirement “any employee employed in a bona fide executive, administrative, or professional capacity[,]” otherwise known as the “white collar” exemption. The FLSA does not define the terms “bona fide executive," "administrative" or "professional capacity.” But the DOL has issued regulations defining these terms to include (i) a salary basis and threshold test (i.e., the employee must be paid a salary and at a certain amount) and (ii) a duties test (i.e., the employee must perform certain duties in order to be considered exempt). The new overtime rule finalized in May 2016 left the duties test untouched for exempt employees under the FSLA but nearly doubled the salary threshold test.

In issuing the injunction, the Texas judge concluded that the states were likely to succeed on the merits because, although the DOL has “significant leeway” to establish the types of duties that might qualify an employee for the white collar exemption, nothing in the language of the statute indicates that Congress wanted the DOL to define the exemption as requiring a salary level threshold. “Congress defined the [white collar] exemption with regard to duties[….]," the judge wrote, "With the final rule, the Department exceeds its delegated authority and ignores Congress’s intent by raising the minimum salary level such that it supplants the duties test.” The judge also found that the cost of complying with the new rule would cause the states to suffer irreparable harm.

The DOL has not yet indicated whether it will appeal the decision, but has stated it is “considering all of [its] legal options.” Meanwhile, a coalition of businesses has filed a motion for summary judgment asking the court to vacate the new rule and to issue a permanent injunction.

What’s Next?

Because the court has enjoined the DOL from implementing and enforcing the new rule, employers are not presently required to comply with its requirements starting December 1, 2016. However, as currently framed, the issued injunction is only temporary, and if the DOL appeals the decision to the Fifth Circuit Court of Appeals, and the decision is reversed, employers could be required to comply with the new rule within a very short timeframe. There are also several scenarios under which the new regulations will never go into effect. First, the Trump administration could decide to withdraw any appeal or otherwise decline to oppose the challenges to the regulations. Second, the DOL in the new administration could draft new regulations, although this would take several months at the very least. Alternatively, Congress could get involved via a legislative overruling of the regulations.

In other words, the final picture is far from clear. Employers that have already reclassified job positions, communicated prospective salary or other changes to employees, put into place new timekeeping practices, or budgeted to account for these changes, will now have difficult decisions to make as they wait for more clarity.

Options

With the present injunction barring DOL implementation of the new overtime regulation, employers may choose from several options with respect to employees that would be impacted by the rule should it become effective in the future.

Given that the injunction issued only days prior to the rule becoming effective, employers should have already planned to address the rule’s requirements and either (i) already implemented changes or (ii) set them to take effect on December 1, 2016.

If an employer has already raised salaries of some employees at or above the new salary level requirements of the rule, or has already started paying overtime to employees who were previously exempt but whose salary levels fall below the new threshold, a rollback of those changes may be problematic. The back and forth would likely be unsettling to employees. While an employer is generally within its rights to make such changes, the ability to do so presents considerations of employee morale. Similar concerns come into play, though perhaps not to the same degree, if the planned changes have been announced but not yet implemented. In either case, the main consideration will be how the employees will react to a reversal of position.

If, on the other hand, planned changes have neither been implemented nor announced, the employer is better positioned to hold off on making any changes until the ultimate status of the rule is determined. This can be a particularly useful option if the employer's compliance plan included increases in salary levels or added overtime payments, in that it allows the employer to delay those added costs while the rule is tested. Having already devised the plan to comply, the employer can quickly implement the needed changes should the rule be later found lawful.

Finally, if an employer was already in the process of “cleaning up” some positions that were incorrectly classified as exempt under the “duties” tests for white collar exemptions, those reclassifications should move forward.